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Stephan Whitaker |

Research Economist

Stephan Whitaker

Stephan Whitaker is a research economist in the Research Department at the Federal Reserve Bank of Cleveland. His current work includes research on housing markets and studies of state and local public finance.

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Meet the Author

Christopher Vecchio |

Research Analyst

Christopher Vecchio

Christopher Vecchio is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. His primary interests include development economics, international economics, and the economics of terrorism.

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03.26.13

Economic Trends

The Impact of Sequestration on Federal Outlays in Fourth District Metropolitan Areas

Stephan Whitaker and Chris Vecchio

During the previous decade, federal expenditures and transfers flowing into the metro areas of the Fourth District rose by 48 percent. By 2010, nine of the district’s ten largest metro areas were receiving inflows of federal funding larger than one-fifth of their gross metropolitan product. Federal money has helped smooth the district’s economy through both the business cycle and structural changes. However, reliance on federal spending means the districts’ metro areas will feel the impact of the sequestrations mandated by the Budget Control Act of 2011.

Federal expenditures include Social Security, Medicare, Medicaid, defense contracts, research grants, and all salaries of military and federal employees. Federal outlays in most Fourth District metros have increased between 37 percent and 55 percent over the decade. The Dayton area experienced the least growth at 29 percent. From 2008 to 2009, federal grants recorded for the Columbus metro area nearly doubled from $3.75 billion to $7.42 billion. These grants, which included stimulus spending, placed Columbus’s federal outlay growth at 67 percent.

When federal inflows are considered relative to Gross Metropolitan Product (GMP), some pronounced differences are revealed across the Fourth District. In the Cleveland and Cincinnati areas, federal spending is just below the national average of 24.1 percent of gross domestic product. In Toledo, Pittsburgh, Columbus, and Akron, federal inflows are 0.75 to 1.5 percentage points higher than the average. Columbus is distinguished by receiving the most in grants—equivalent to 8.6 percent of its GMP—while its direct payments receipts, including Social Security and Medicare, are very low at 7.6 percent of GMP. In the Erie and Youngstown metro areas, direct payments equal 18.2 percent and 24.6 percent of the metros’ GMPs, respectively. Dayton, Erie, and Youngstown receive federal inflows equal to more than 29 percent of their GMPs. In Dayton, a mid-sized metro (approximately 850,000 residents), the presence of a major military installation, Wright-Patterson Air Force Base, can be seen in the salaries and in the procurement category, which includes defense procurement.

The sequestration’s cuts exempt Social Security, Medicaid, and military pay. Cuts of 7 percent to 10 percent will be imposed on nonmandatory spending, including defense spending other than military pay. Medicare was not entirely exempt, but the cut to Medicare was limited to 2 percent. In this round of cuts, Columbus and Dayton stand to lose the most because their receipts of grant, salary, and procurement income are the largest relative to their GMPs. An 8 percent decrease in grants (excluding Medicaid), salaries, and other expenditures would correspond to a loss of $1.1 billion or 1.2 percent of the GMP for Columbus. For Dayton, an 8 percent cut would correspond to $408 million, which is also approximately 1.2 percent of its GMP. This assumes a third of Dayton’s federal salaries are drawn by military members, and thus would be exempt.

More recent data would help us understand the immediate impact of the sequestration, but the source of our data above, the Consolidated Federal Funds Reports (CFFR), was discontinued after reporting on the 2010 Fiscal Year. An alternative source of data is available from the Bureau of Economic Analysis (product CA35), though it is an incomplete substitute. The CFFR grouped Social Security, Medicare, and Medicaid payments into its “direct payment” and “grants” categories. These three large budget items are also reported in the “personal transfers” category of the BEA’s product CA35. From the BEA’s 2010 to 2011 figures, we can see that “personal transfers” from the federal government rose only modestly or declined for most metro areas after adjusting for inflation.

Metro Aggregate Flows Including Social Security, Medicare and Medicaid

 
CFFR 2010
BEA CA35
BEA CA35
BEA CA35
 
Direct payments and grants, 2010
Personal transfer receipts, 2010
Personal transfer receipts, 2011
Percent change, 2010 to 2011
Akron 4.68 5.44 5.43 −0.2
Cincinnati 12.90 14.50 14.44 −0.4
Cleveland 16.50 16.80 16.87 0.4
Columbus 15.10 11.70 11.83 1.1
Dayton 6.21 6.53 6.53 0.1
Erie 2.03 2.45 2.40 −1.9
Lexington 1.01 2.90 2.89 −0.4
Pittsburgh 20.10 21.50 21.04 −2.2
Toledo 4.65 5.31 5.32 0.2
Youngstown 4.95 5.26 5.23 −0.7

Notes: Figures are in billions of 2010 dollars. The CFFR, discontinued after reporting on the 2010 fiscal year, grouped Social Security, Medicare, and Medicaid payments into its “direct payment” and “grants” categories. The BEA’s product CA35 groups these items in its “personal transfers” category.
Sources: Consolidated Federal Funds Reports , U.S. Census Bureau, Bureau of Economic Analysis (product CA35).

Despite the recent pause, personal transfers should be driven higher by two strong trends: the increase of health care costs and the aging of the population. Social Security and Medicare payments are positively related to the share of the population that is over 65. Over the next decade, the cohort of people currently aged 55 to 64 will become eligible to receive these benefits. This cohort is nearly as large as all cohorts over 65 combined.

Policymakers in every region of the Fourth District have pursued explicit policies of growing “Eds and Meds” sectors. These growth industries depend heavily on federal expenditures. If future entitlement reforms apply a sequestration-like cut (8 percent, for example) to Social Security and Medicare, this would reduce payment flows to Akron and Pittsburgh by the equivalent of nine-tenths of a percentage point of their GMP. The same cut would reduce funding to Erie and Youngstown, which rely heavily on Social Security and Medicare dollars flowing to their elderly, by 1.1 percent and 1.5 percent of their GMPs, respectively. To the extent that there is a multiplier effect of federal spending in a region, the cumulative impact of federal spending cuts could be worse than these direct impacts. Federal jobs, contracts, and pensions used to be prized because they were stable through the business cycle and even countercyclical. The impending arrival of federal budget cuts reminds us that being dependent on politically-determined streams of revenue carries its own risks.